Taxation for Capital Gains and Capital Losses

The profit you make on the sale of an asset is referred to as a Capital Gain while the loss you make on selling an asset is a Capital Loss. According to the IRS, an asset is any item that you own whether for investment or personal use and that retains value over time. It includes such items as your car, your boat, your home, rental property, furniture, stocks, bonds or mutual funds. The profit or loss is calculated by subtracting the basis (purchase price after adjusting for depreciation) from the sales price of the asset. Capital gains are generally taxed at a lower rate as compared to one's income tax rate. Below are some of the rules that apply to the taxation of capital gains and losses.
Real Estate and Other Personal Property
The IRS expects you to keep the purchase receipt and documentation for your home or rental property. Once you sell, you are to subtract the sales price to the original purchase price or the basis price. If you make a profit on the sale of your property, you will need to report it as a capital gain. If you owned the property for less than a year, it is reported on the Schedule D of the Form 1040 as a short term capital gain while if you owned it for more than a year, you will report it as a long term gain.
On the other hand, if you have a loss on your personal home, car or on any other asset bought for personal use, you are not allowed to deduct the loss for tax purposes and have to take the full hit on the loss. However, you can deduct losses made on rental property and other investment real estate assets subject to further IRS rules.
Stocks and Mutual Funds
Determining capital gains and losses for stocks and mutual funds is more complicated as compared to that of other assets. This is because the same stock may be bought and sold at different prices and the assets may trade frequently over a given tax year. There are various accounting basis calculations and a taxpayer may choose any basis calculation option as long as he or she maintains consistency. Furthermore, from 2011, stockbrokers and mutual funds managers are now required to maintain the basis for the assets of their clients and compute the capital gains and losses for assets sold. The details of the yearly capital gains and losses are then to be sent to the client on the Form 1099B. A taxpayer can therefore use the information from the Form 1099B to report the gains and losses. However, for assets purchased before 2011, a taxpayer may have to calculate his or her own capital gains and losses.
Accounting for Capital Losses
If you have had any qualifying capital losses in a given year, you are to subtract the short term capital losses from the short term capital gains and the long term capital losses from the long term gains. If your net balance for both long term and short term gains remains a loss, you may subtract up to $3,000 of the loss from your Adjusted Gross Income before computing your taxes. However, for married couples who file separately, the limit for this capital loss deduction goes down to $1,500. If your net loss is larger than this annual limit, you may carry forward the loss to subsequent years. However, there are further rules that apply to this.